Management by Objectives

The concept of ‘management by objectives' became popular in the United States in the 1950s when highly respected business expert Peter Drucker (1909-2005) wrote his influential book The Practice of Management (1954). The definition of management by objectives (MBO) is "a technique in which all levels of management are encouraged to specify and agree quantitative and/or qualitative objectives to be achieved within a set period and to answer to higher levels of management for the actual performance achieved against these objectives," according to the Dictionary of Accounting (1999) by R. Hussey.

Drucker was highly praised by The Economist in November 2005, which proclaimed: "His reading of history enabled him to see through the fog that clouds less learned minds." In his theory Drucker outlined how better goals could be set for employees if there was collaboration in setting them.

Tom Berliner, dean of the School of Leadership and Business at Judson University, wrote in The Beacon News in Aurora, Illinois (May 1, 2011) that prior to MBO, managers had simply called in employees and told them what they felt should be goals for the year, much to the frustration of most employees. Under Drucker's vision the MBO process demands that both the senior manager and employee individually come up with goals for the employee. The next step would be to sit down and negotiate these goals, ensuring that they are both challenging and realistic. For high achievers, Drucker strongly believed that managers must be careful to tone down the employee's "aggressiveness," and for low achievers bosses should encourage the employee to think towards more "elevated" goals to help "envision their achievement."

According to academic Dzulkifli Abdul Razak writing in The New Straits Times (Jan 1, 2006), Drucker "set the direction and tone for the future of management." He explains: "No doubt his insights and innovations had impacted the views of many well-known corporate and national leaders. More importantly, they also caused thousands of businesses to change course in the workplace." Razak adds that Drucker was known for a number of other management-related concepts including privatisation, decentralisation and outsourcing. He came up with key concepts such as "knowledge workers" in the late 1950s, and was noted for his emphasis on human resource development (HRD), innovation, creativity and entrepreneurship. Drucker was a prolific writer, with more than 40 books, including The End of Economic Man: The Origins of Totalitarianism (1939) and Innovation and Entrepreneurship: Practice and Principles (1985).

In the International Encyclopedia of Public Policy and Administration (L-Q Volume 3, 1998), Jay M. Shafritz reported on how Drucker criticized the simple notion that the objective of business was to make profits. He suggested instead that profit is simply the test of the validity of the business enterprise and it was not realistic to think of an organization as having one single objective. Drucker believed that the need for juggling these multiple objectives in complex departmentalized organizations required MBO. He also felt strongly that objectives in a business empire would embody past lessons in order to help predict future behavior and allow reflection about previous decisions. This process would also enforce detailed planning and enable future performance to be improved.

MBO really took off in the private sector in 1961 when the U.S. Department of Defense introduced a planning, programming, and budgeting system (PPB) system, which incorporated objective setting as a major element. In 1965, PPB was imposed on all major agencies of U.S. Federal Government. In a major step forwards in the early 1970s, the Nixon administration imposed "presidential MBO" and the practice soon spread to many state and local governments. It was also implemented in England by the Greater London Council. However, critics of MBO have voiced concerns about the focus on management objectives to the exclusion of the aims of other stakeholders, and some argued MBO would "neglect implicit and informal objectives."

One leading critic was W. Edwards Deming (1900-1993). American Decades (Jan 1, 2001) reported how businesses, seeking to succeed in the face of fierce competition of the global economy, picked up on the teachings of Deming during the 1980s and flocked to him for his advice. Deming's clients included the Ford Motor Company, General Motors and Hughes Aircraft. Deming, who wrote about his theory in Out of the Crisis (1982), believed that management, rather than the workers, was the problem, and that the quality of the organization would inevitably get better if employees were given power over production.